F5 Posts Handy Earnings Surprise

When you’re a fast growing stock with a price-to-earnings ratio of 36 on trailing 12-month earnings, you’d better beat expectations.

Which is exactly what F5 Networks (FFIV) did when it reported earnings for the fourth quarter of fiscal 2011 on October 25. Earnings of $1.06 a share were 8 cents better than the Wall Street consensus. (F5 Networks is a member of my Jubak’s Picks portfolio.)

Revenue climbed 24% year-to-year and earnings jumped 40%.

For the December quarter, the company issued guidance for earnings of 99 cents to $1.01 a share and revenue of $315 million to $320 million. That roughly matched Wall Street expectations for $1.01 a share in earnings and $320 million for revenue. Not bad guidance for a quarter that has led to lower projections by some technology companies.

Somewhat unusually in the current economic climate, F5 Networks talked more than a quarter ahead in its conference call. The December quarter might show a little seasonal weakness, but the company expects to see revenue growth accelerate in the March quarter.

Revenue growth should be at least 20% for all of fiscal 2012. That’s better than the 18.6% estimate from Wall Street analysts. Gross margin will be near 82% during the year.

That latter number may have caught Wall Street’s attention—well, that and the company’s operating margin of 39%.

It’s all too typical for a fast-growing company to lose control of costs as it expands or at least to see costs creep upwards faster than sales. That isn’t happening at F5 Networks, though. Operating expenses will increase at a lower rate than sales in fiscal 2012, Standard & Poor’s projects.

Which is especially noteworthy because F5 Networks is aggressively expanding its market reach, from its core business of controllers for delivering applications across networks to target the fast-growing storage virtualization and security markets. Those extensions are natural for a company whose products act to efficiently allocate resources across a network.

Gaining substantial share in those markets, however, is a long-term effort with potentially substantial costs. And yet, so far, F5 Networks is handling that while keeping operating margins above 30%.

Much of this quarter’s performance was originally baked into my target price of $120 for September 2012. On the surprise and the positive take on the March quarter, I’m raising my target price to $124 for April 2012. That’s roughly 17% above the October 27 close of $105.72.

If you want to read this as saying that I think the stock is a good choice for an end of the year rally, but likely to continue to be very volatile with any economic slowdown in 2012—remember, I added these shares to the Jubak’s Picks portfolio at $76.70 on September 28—I certainly wouldn’t call you wrong. (See my recent post for more on whether or not to go with the ’mo.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of F5 Networks as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio here.